The Tribune

• ‘Taking medicine now’ on card services investment

• Onboards ‘more than three times’ merchants target

• Won’t participate in ‘race to bottom’ to grow loans 

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Fidelity Bank (Bahamas) has cut its full-year profit forecast by $2m-$2.5m after incurring more upfront costs than anticipated with the ongoing roll-out of its merchant and card services.

Gowon Bowe, the BISX-listed commercial lender’s chief executive, told Tribune Business these investment will pay-off in future years with the bank deciding “take our medicine now” and unveil a revised 2022 profit forecast of between $22.5m to $23m.

Confirming the revision to the initial $25m target, he added that demand for the ‘Click and Pay’ card services has exceeded all expectations with merchant numbers three times’ more than that projected for the full year after just nine months. October was some 30 percent ahead of forecast. 

Speaking after Fidelity Bank (Bahamas) unveiled a 12.5 percent year-over-year net income decline, from $17.796m to $15.571, for the nine months to end-September 2022, Mr Bowe told this newspaper that the continued growth in total income reassured that the commercial lender’s strategy is on the right track despite the temporary increase in costs.

“As it relates to the full year profit target, we are moving that,” he disclosed. “We do not anticipate $25m, but we do expect in the fourth quarter that we will pick up some of the stagger and be consistent with last year around $22.5m to $23m.”

Explaining the $1.8m year-over-year decrease in net income, which was largely driven by a 27.3 percent jump in general and administrative expenses, Mr Bowe said: “We have done a significant and consistent job in maintaining our net interest income.

“While we have seen some decrease in interest income, which is driven by the loan book decreasing, we’ve mitigated that from investment securities returns and interest expense is on the decline because we redeemed the bonds.” Fidelity Bank (Bahamas), he added, will save some $1.1m per year in interest expenses through repaying some $20m worth of bond principal to investors back in May 2022.

The benefits from this will start to emerge as early as the 2022 third and fourth quarters, Mr Bowe said, adding: “While our net interest income is relatively flat, the fee and commission income with card services is on an upward trajectory, and as it relates to total income we’re ahead of the prior year.”

Fee and commission income for the nine months to end-September 2022 was some 70.5 percent ahead of prior year comparatives, standing at $4.464m and an increase of almost $2m. That, in turn, drove Fidelity Bank (Bahamas) some 3.3 percent higher year-over-year to $44.209m for the period.

As for the surge in expenses, Mr Bowe explained that these largely related to the initial investment required in launching the merchant and card services. While these costs will not be “incurred” in future years, or be “recurring”, he added that they were “higher than budgeted for” in 2022.

“It’s in relation to the escalation of the card services business,” he told Tribune Business, “so there are some some additional onboarding costs we are now working through as we take on the additional and new persons. We recognise all these things come at a particular cost. We also do recognise that, ultimately, some of the IT infrastructure costs and process support we are incurring certain costs as we maintain them.”

Other cost increases related to ‘chip and pin’ and ‘tap technology’ upgrades sought by MasterCard through its various mandates, “which do blindside you at times”, as well as expenses associated with Fidelity Bank (Bahamas) planned Family Island roll-out; a return to pre-COVID levels of charitable donations; greater promotional and marketing spend; and increased VAT incurred on all these costs.

“We tend to take them upfront,” Mr Bowe said of the increased expenses. “We try not to defer them over a period of time. We take our medicine upfront. It’s fairly consistent. I wouldn’t say general and administrative expenses numbers have run away from us in any meaningful way; it’s just some of those expenses we take upfront.

“Some of these elements are laying the foundation for future growth and development, and ultimately these are costs that are going to benefit us in future. We take all these expenses upfront. As an accountant, I say I take my bad news when it comes so that it doesn’t linger and hurt my good news in the future.

“We are comfortable that we are on target because total income is ahead of where we were in prior years. Our initiatives are generating revenue as expected. Yes, we are replacing some of the interest income decline with fees, and some of the expense increases have a multi-year impact. If there were declining revenues we would be concerned, but it’s easier for us to control costs than develop new revenue streams. From that perspective we are satisfied the initiatives are achieving their goals.”

Fidelity Bank (Bahamas) saw its general and administrative expenses for the first nine months of 2022 rise by more than $2.6m, growing from $9.677m to $12.32m. Staff salaries and benefits also rose, jumping 9 percent year-over-year from $9.417m to $10.265m. As a result, total expenses surged by 14.5 percent to $28.616m compared to $24.991m the year before, an increase of more than $3.6m.

Mr Bowe, describing the merchant and card services roll-out as “a tremendous success”, said Fidelity Bank (Bahamas) planned to bring some functions in-house to enable it to better “keep up with the level of demand we’ve been experiencing” and better control both costs and processes.

“For the year we have actually onboarded more than three times what we had targeted,” he added of merchant numbers. “We exceeded our growth projections for October by 30 percent.” The Fidelity chief explained that the initiative provides micro, small and medium-sized businesses (MSMEs) as well as entrepreneurs with the functionality they need to accept debit/credit card and digital payments from tourists at reasonable cost.

“While we have a significant number coming on, their spend has not yet reached a steady state. We are extremely excited in that regard, because once they get to their steady state we will see an even higher jump,” Mr Bowe said.

With the bank being “more aggressive in filling vacancies than we have in the past”, a move partly responsible for the rise in salary and benefit expenses, he added that The Bahamas’ first ever credit bureau has already improved risk assessment and borrower quality by driving persons to regularise their existing credit facilities before they take on more debt.

“Our view is not to have a race to the bottom where adjustments in interest rates are not reflective of the underlying risk,” Mr Bowe said. “We are losing some clients to other institutions because they have been offered lower interest rates, but we think that is going to be a recipe for pressure, so we are maintaining our credit quality and hoping to keep that borrower through customer relationship management.

“If you improve your credit profile we will work with you, but if you have less than a satisfactory profile we will not adjust interest rates to compete in what we believe is a race to the bottom.”